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CASH TRANSACTION RESTRICTION-PENALTY-REPORTING INCOME TAX ACT

In the past few years, amendments are being made under Income Tax Act, 1961 to curb black money routing through cash transactions. Government is making a lot of efforts to avoid cash transactions. Tools are being implemented to catch those transactions which may be income of the assessee, who is entering those transactions, and not disclosing, while filing return of income. The Finance Act, 2017 has also made certain more amendments to push India towards less cash economy and to reduce generation and circulation of black money. Under the Income Tax Act, there are various provisions which restrict cash transactions by restriction through disallowance, higher taxation, penalties, reporting by Annual Information Report (AIR), withdrawal of benefits, providing incentives for non cash transaction, reporting in ITR forms etc. In the present article, provisions, which are related to restriction of cash transactions under Income Tax Act, 1961 along with amendment made by Finance Act, 2017 are discussed. Provisions may cause disallowance, penalty, higher taxation or selection of case through Computer Aided Scrutiny System (CAAS). Read on to know more….

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A :RESTRICTION THROUGH DISALLOWANCE

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1. Section 32

The Finance Act, 2017 amended Section 32 of the Income-tax Act, 1961 and provided that where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost of such asset. Meaning thereby that no depreciation is allowable on capital expenditure in cash exceeding Rs 10,000/- and consequently it will also change calculation of capital gain.

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2. Section 35AD

Finance Act, 2017 amended Section 35AD of the Act to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.

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3. Section 40A(3) & 40A(3A)

No deduction is allowed for cash payments exceeding Rs 20,000/- for expenditure or allowance claimed under business head. In case of payment made for plying, hiring or leasing goods carriages, the limit stands enhanced to Rs 35,000/.

No [Disallowance under Section 40A(3)] and 40A(3A) is made in such cases and under such circumstances as prescribed under Rule 6DD of the Income Tax Rules, 1962, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Finance Act, 2017 reduced the limit of cash payment from present Rs 20,000/- to Rs 10,000/-.

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4. Section 80D

No deduction u/s 80D is allowable if paid in cash other than preventive health check-up expenditure.

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5. Section 80G

Deduction in respect of donation exceeding Rs 10,000/- is allowable where such sum is paid by any mode other than cash. Finance Act, 2017 reduced this limit of allowability from present Rs 10,000/- to Rs 2,000/-.

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6. Section 80GGA

Deduction in respect of donation for scientific research or rural development exceeding Rs 10,000/- is allowable where such sum is paid by any mode other than cash.

Deduction in respect of contribution given by any person to political parties is allowable where such sum is paid by any mode other than cash.

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B :RESTRICTION THROUGH HIGHER TAXATION

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1. Section 68

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Here, any sum includes cash also. Income chargeable under this Section would attract higher taxation u/s 115BBE at the rate of 60 % along with Surcharge of 25% of Tax. Penalty is also leviable at the rate of 10%.

If the assessee himself declares the income in his return u/s 115BBE, then no penalty is leviable.

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2. Section 69

Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year. Here, money includes cash also.

Income chargeable under this Section would attract higher taxation u/s 115BBE at the rate of 60 % along with Surcharge of 25% of Tax. Penalty is also leviable at the rate of 10%. If the assessee himself declares the income in his return u/s 115BBE, then no penalty is leviable.

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3. Section 115BBC

An assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in subclause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of Section 10 or any trust or institution referred to in Section 11, receive any income by way of any anonymous donation then it would be chargeable at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following, namely:—

(A) five per cent of the total donations received by the assessee; or

(B) one lakh rupees.

this Section is not applicable to any anonymous donation received by—

(a) any trust or institution created or established wholly for religious purposes;

(b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

Here, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of Section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed. This includes cash donation also.

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C: RESTRICTION THROUGH PENALTIES

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1. Section 269SS

No person can take or accept any loan or deposit or any specified sum of Rs 20,000/- or more from any other person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

This provision is not applicable to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by:-

(c) any corporation established by a Central, State or Provincial Act;

(d) any Government company as defined in clause (45) of Section 2 of the Companies Act, 2013 (18 of 2013);

(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

Further, the provisions of this section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act.

Here, specified sum means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.

Non-compliance of this provision would attract equal penalty u/s 271D.

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2. Section 269ST

Finance Act, 2017 inserted new Section 269ST in the Act to provide that no person shall receive an amount of two lakh rupees or more,—

(a) in aggregate from a person in a day;

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

It is further provided that the said restriction shall not apply to Government, any banking company, post office savings bank or cooperative bank.

Further, it is also provided that such other persons or class of persons or receipts may be notified by the Central Government, for reasons to be recorded in writing, on whom the restriction on cash transactions shall not apply.

Non-compliance of this provision would attract equal penalty u/s 271DA.

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3. Section 269T

No branch of a banking company or a cooperative bank and no other company or cooperative society and no firm or other person can repay any loan or deposit made with it or any specified advance received by it for sum of Rs 20,000/- or more otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic clearing system through a bank account.

This section is not applicable to repayment of any loan or deposit or specified advance taken or accepted from—

(iii) any corporation established by a Central, State or Provincial Act;

(iv) any Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956);

(v) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

Here, "specified advance" means any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.

Non-compliance of this provision would attract equal penalty u/s 271E.

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D: RESTRICTION THROUGH REPORTING BY ANNUAL INFORMATION REPORT (AIR)

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1. Rule 114E

This rule has been amended to get information related to financial transaction through cash and by other mode in excess of threshold specified in provisions through AIR covering large number of assessee as well as non assessee.

The statement is required to be furnished by every person mentioned in column (3) of the Table below in respect of all the transactions of the nature and value specified in the corresponding entry in column (2) of the said

Table in accordance with the provisions of sub rule (3). Hereunder, only transaction related to cash is given for ready reference. Serial number is being given according to original rule.

Sl.
No.

Nature and value of
transaction

Class of person
(reporting person)

1

(a) Payment made in
cash for purchase of bank drafts or pay orders or banker's cheque of an
amount aggregating to ten lakh rupees or more in a financial year.
(b) Payments made in cash aggregating to ten lakh rupees or more during the
financial year for purchase of pre-paid instruments issued by Reserve Bank of
India under Section 18 of the Payment and Settlement Systems Act, 2007 (51 of
2007).
(c) Cash deposits or cash withdrawals (including through bearer's cheque)
aggregating to fifty lakh rupees or more in a financial year, in or from one
or more current account of a person.

A banking company or
a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949)
applies (including any bank or banking institution referred to in Section 51
of that Act).

2

Cash deposits
aggregating to ten lakh rupees or more in a financial year, in one or more
accounts (other than a current account and time deposit) of a person.

(i) A banking
company or a co-operative bank to which the Banking Regulation Act, 1949 (10
of 1949) applies (including any bank or banking institution referred to in
Section 51 of that Act);
(ii) Post Master General as referred to in clause (j) of Section 2 of the
Indian Post Office Act, 1898 (6 of 1898).

4

Payments made by any
person of an amount aggregating to—
one lakh rupees or more in cash against Acts raised in respect of one or more
credit cards issued to that person, in a financial year.

A banking company or
a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949)
applies (including any bank or banking institution referred to in Section 51
of that Act) or any other company or institution issuing credit card.

11

Receipt of cash
payment exceeding two lakh rupees for sale, by any person, of goods or
services of any nature (other than those specified at Sl. Nos. 1 to 10 of
this rule, if any.)

Any person who is
liable for audit under Section 44AB of the Act.

12

Cash deposits during
the period 09th November, 2016 to 30th December, 2016
aggregating to—
(i) twelve lakh fifty thousand
rupees or more, in one or more current account of a person; or
(ii) two lakh fifty thousand rupees
or more, in one or more accounts (other than a current account) of a person.

(i) A banking company or a co- operative bank
to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any
bank or banking institution referred to in Section 51 of that Act);
(ii) Post Master General as referred
to in clause (j) of Section 2 of the Indian Post Office Act, 1898 (6 of
1898).]

13

Cash deposits during
the period 1st of April, 2016 to 9th November, 2016 in
respect of accounts that are reportable under Sl.No.12.

(i) A banking company or a co- operative bank
to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any
bank or banking institution referred to in Section 51 of that Act);
(ii) Post Master General as referred
to in clause (j) of Section 2 of the Indian Post Office Act, 1898 (6 of
1898).]

The reporting person mentioned in the Table other than the person at S. No. 11 is required, while aggregating the amounts for determining the threshold amount for reporting in respect of any person as specified in the Table—

(a) take into account all the accounts of the same nature as specified in column (2) of the said Table maintained in respect of that person during the financial year;

(b) aggregate all the transactions of the same nature as specified in column (2) of the said Table recorded in respect of that person during the financial year;

(c) attribute the entire value of the transaction or the aggregated value of all the transactions to all the persons, in a case where the account is maintained or transaction is recorded in the name of more than one person;

(d) apply the threshold limit separately to deposits and withdrawals in respect of transaction specified in item (c) under column (2), against Sl. No. 1 of the said Table.

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E : Restriction through withdrawal of benefits

In order to discourage the cash transactions and to bring transparency in the source of funding to political parties, the Finance Act, 2017 amended the provisions of Section 13A to provide for additional conditions for availing the benefit that no donations of Rs 2000/- or more is received otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bonds.

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F: Restriction through providing incentives for non cash transaction

Finance Act, 2017 amended Section 44AD of the Act to reduce the existing rate of deemed total income of eight per cent to six per cent in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-Section (1) of Section 139 in respect of that previous year.

It is another way to discourage cash transaction though lower rate of net profit on transaction other than cash mode.

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G: Restriction through reporting of cash deposit in ITR forms during demonetisation period

After demonetisation, Government amended ITR forms for A.Y.2017-18 to include information regarding cash deposit during 09/11/2016 to 30/12/2016. For this period, entire cash deposit is required to be reported whether in specified bank notes or in any other denomination. It is very much possible that this reporting may continue in return forms for subsequent periods. This will definitely change the mindset of public at large. Because it will be one of the parameters for selection of case for scrutiny under CASS by comparing deposits with reported income in ITR forms.

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CONCLUSION

Certain cash restricting provisions directly affect taxpayers by way of disallowance, penalties or higher taxation. But certain provisions like furnishing of statement of financial transaction is not affecting directly, but it is affecting adversely even very small taxpayers.

For illustration, under S.No.11 of furnishing of statement of financial transaction, person liable for reporting is the assessee, who is liable for tax audit, but person for whom he is reporting may be any person who is payer of Rs 2,00,000/- or more in cash during financial year for any goods and services. Provisions which are directly affecting are liable to be reported through Tax Audit Report and frequent violation may attract disallowance or penalties.

Provisions which are not affecting directly are liable to be reported through Annual Information Report (AIR). Now, most of the cases are being selected for scrutiny under Income Tax Act through CASS. Above provisions including reported data through furnishing of statement, are parameters, which are fixed for computers, for selection of cases after analysing with return filed by the assessee. One must take care before entering cash transaction as these may be cause for selection of his case for scrutiny. Precaution must be taken while entering into transactions. Either it must be within threshold limit prescribed for cash transaction or it must be through banking channel to avoid any reporting to Income Tax Department. After mandatorily e-filing of return, in most of cases, it becomes easier for the Department to reach at the taxpayer with adequate information related to the assessee after analysing data through system.

Even having genuine business/personal transaction, ones selected for scrutiny, would have to face harassment from Department officials and would remain always in fear that there may be thorough scrutiny of entire transactions rather than only reported transactions. Aim of the present Government seems to make India a less cash society.

More measures are likely to be proposed in years to come. However, before going to the path of digitalisation and non-cash economy, more infrastructure in needed. Government should simultaneously take measures to develop the basic infrastructure like electricity, internet etc. at rural and urban areas, so that the objective of the Government can be achieved in a proper way.

[By :CA. Deepak Kalani]

(The author is a member of the ICAI He can be reached at kalani.deepak@icai.org )